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Latvia’s currency peg to the euro has become a punchbag for economists convinced that the Baltic state is inflicting unnecessary pain on its citizens. But devaluation of the lat risks mass defaults by citizens and companies. Four-fifths of private loans are in euros, and large-scale default would cripple the banking system. The Swedish banks that have lent billions of euros in Latvia would also be vulnerable.

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Just when it looked as if Latvia’s currency peg to the euro had weathered the storm, the International Monetary Fund has raised fresh doubts by withholding funds for the Baltic European Union newcomer.